GCR affirms Bank of Kigali Plc’s and BK Group Plc’s national scale issuer ratings of AA+(RW) and AA(RW), respectively; Outlooks Stable Rating Action Johannesburg, 23 September 2020, GCR Ratings (‘GCR’) has affirmed the Rwandan long and short- term issuer ratings on Bank of Kigali Plc (‘Bank of Kigali’, ‘the bank’) of AA+(RW) and A1+(RW), respectively, with outlook accorded as Stable. At the same time, GCR has affirmed BK Group Plc’s (‘BK Group’, ’the group’) national scale long and short-term issuer ratings of AA(RW) and A1+(RW), respectively, with a Stable Outlook. Rated Entity / Issue Rating class Rating scale Rating Outlook / Watch Bank of Kigali Plc Long Term issuer National AA+(RW) Stable Outlook Short Term issuer National A1+(RW) Rated Entity / Issue Rating class Rating scale Rating Outlook / Watch BK Group Plc Long Term issuer National AA(RW) Stable Outlook Short Term issuer National A1+(RW) Rating Rationale Bank of Kigali is the largest subsidiary of BK Group, a holding company with three other subsidiaries, namely BK General Insurance, BK TecHouse and BK Capital Ltd. The smaller subsidiaries are growing revenue contributions and represented approximately 10% of PAT of the group at HY20. We think that Bank of Kigali will continue to be the most significant subsidiary of the group for the foreseeable future and will therefore continue to drive the rating accorded to the group. The ratings on the bank balance its position as a market leader in Rwanda, strong capitalisation, sound funding structure, good liquidity with its modest risk position. Bank of Kigali is the largest bank in Rwanda’s somewhat overbanked and increasingly competitive banking sector, and had strong market shares of approximately 30% by total assets, 36% of loans and 31% by customer deposits as of June 2020. While geographical diversification is limited to Rwanda, it has the broadest geographical reach within the country, relative to peers through physical branches, ATM’s, POS and agents. Business lines are considered to be moderately diversified in the Rwandan market context, with corporate banking accounting for 71% of revenues and retail accounting for 16%. The bank’s revenue stability, augmented by sustained year-on-year increases in both interest and non-interest income in the past five years, is viewed positively especially during this stress period. GCR considers the bank to be well capitalised on the back of a GCR total capital ratio of 29,5% at 1H20. We anticipate that the capital ratio to come down by 200bps over the next couple of years, as risk weighted asset growth outstrips internal capital generation (post dividends). We anticipate moderate loan growth over the next couple of years but the increased impairments will raise the risk-weighting more. Profitability is expected to moderate but still remain at robust levels, with return on assets expected to be around 2.5%-3% over the next two years. The risk position of the bank is a relative weakness compared with rated peers. A deterioration in the quality of the bank’s loan book is noted. Annualised credit losses have averaged around 2.3% over the past five years. During 1H20, the risk costs increased again, but largely resulting from a conservative macroeconomic overlay due to the COVID-19 pandemic. Having said that, given the severe economic pressures, cost of risk is expected to remain high for the next 12-18 months. The bank’s nonperforming loans (NPL) ratio of around 6% is broadly in line with Rwandan peers, however its stronger than a majority of the Kenyan peer group. We expect NPLs to increase moderately going forward, because the bank is exposed to some vulnerable sectors such as hotels and restaurants (13,9% of gross loans), construction (10,7%) and manufacturing (9,5%). The retail loan book (12% of gross loans) may also face some pressure, as only 47% of the retail loan book is collateralised. Overall, the bank had restructured over 30% of its loan book at 1H20. Positively, we consider loan loss reserving of c120% or nearly 8% of total loans at 1H20 to provide good coverage of expected losses. Foreign currency lending accounted for 16% of total loans at FY20 and is considered to be modest versus regional peers. The bank’s short net-open position of 10% of shareholder funds at FY20 is considered to be ratings neutral. The bank’s funding is considered to be stable, with customer deposits making up 90% of the group’s funding base at HY20. Though deposits are predominantly demand deposits they have historically been sticky. Furthermore, there is increasing diversification in the customer base. At 1H20, the deposit base was split between large corporate (47%), SMEs (12%), NBAs (8.5%) and retail 24%). Despite, increasing diversification the deposit book is somewhat concentrated (like many Rwandan peers), with the top 20 depositors accounting for 31,6% of total depositors. Cost of funds equated to a modest 3.6% at 1H20 (FY18: 3.0%). The bank’s liquidity is viewed to be good, with liquid asset covering total wholesale funding by 3,5 times and 31% of customer deposits at 1H20. The long-term national scale rating of AA(RW) accorded to BK Group (the non-operating holding company – ‘NOHC’) is one notch below the bank’s rating of AA+(RW) to reflect the NOHC’s structural subordination. Rating Outlook The outlook is stable. Despite the highly pressurised environment, we expect the bank’s financial profile to remain resilient over the next two years. Capital is expected to range between 25% and 27%, cost of risk between 2.5% and 3%, and liquidity to remain robust. Rating Triggers We could lower the rating if asset quality or capitalisation deteriorate at quicker than anticipated levels. Positive rating is unlikely in the current environment but improved internal capital generation against risk-weighted asset growth and better asset quality could improve the ratings. Analytical Contacts Primary analyst Simbarake Chimutanda Financial Institutions Analyst Johannesburg, ZA [email protected] +27 11 784 1771 Secondary analyst Matthew Pirnie Group Head of Ratings Johannesburg, ZA [email protected] +27 11 784 1771 Committee chair Vinay Nagar Senior Financial Institutions Analyst Johannesburg, ZA [email protected] +27 11 784 1771 Related Criteria and Research Criteria for the GCR Ratings Framework, May 2019 Criteria for Rating Financial Institutions, May 2019 GCR Ratings Scale, Symbols & Definitions, May 2019 GCR Country Risk Scores, June 2020 GCR Financial Institutions Sector Risk Score, August 2020 Ratings History Bank of Kigali Plc Rating class Review Rating scale Rating class Outlook Date Long Term issuer Initial National A+(RW) Stable October 2010 Last National AA+(RW) Stable November 2019 Short Term issuer Initial National A1(RW) n.a October 2010 Last National A1+(RW) n.a November 2019 BK Group Plc Rating class Review Rating scale Rating class Outlook Date Long Term issuer Initial/last National AA(RW) Stable November 2019 Short Term issuer Initial/last National A1+(RW) n.a November 2019 Risk Score Summary Rating Components & Factors Risk scores Operating environment 7.75 Country risk score 3.75 Sector risk score 4.00 Business profile 1.50 Competitive position 1.50 Management and governance 0.00 Financial profile 1.50 Capital and Leverage 1.50 Risk (1.00) Funding and Liquidity 1.00 Comparative profile 0.00 Group support 0.00 Government support 0.00 Peer analysis 0.00 Total Score 10.75 Glossary Capital The sum of money that is invested to generate proceeds. Cash Funds that can be readily spent or used to meet current obligations. Cash Flow The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing activities. Credit An opinion regarding the creditworthiness of an entity, a security or financial Rating instrument, or an issuer of securities or financial instruments, using an established and defined ranking system of rating categories. Debt An obligation to repay a sum of money. More specifically, it is funds passed from a creditor to a debtor in exchange for interest and a commitment to repay the principal in full on a specified date or over a specified period. Liquidity The speed at which assets can be converted to cash. It can also refer to the ability of a company to service its debt obligations due to the presence of liquid assets such as cash and its equivalents. Market liquidity refers to the ease with which a security can be bought or sold quickly and in large volumes without substantially affecting the market price. Salient Points of Accorded Ratings GCR affirms that a.) no part of the rating process was influenced by any other business activities of the credit rating agency; b.) the ratings were based solely on the merits of the rated entity, security or financial instrument being rated; and c.) such ratings were an independent evaluation of the risks and merits of the rated entity, security or financial instrument. The credit ratings have been disclosed to BK Group Plc. The ratings above were solicited by, or on behalf of, the rated entities, and therefore, GCR has been compensated for the provision of the ratings. BK Group Plc participated in the rating process via face-to-face management meetings, and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible. The information received from BK Group Plc and other reliable third parties to accord the credit rating included: Audited financial results as at 31 December 2019; Unaudited financial results as at 30 June 2020; Banking sector information; A breakdown of facilities available and related counterparties; Industry comparative data..